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Government Rules Out Excise Duty Cut As Petrol, Diesel Prices Peak

With limited fiscal space available, the government will not cut excise duty on petrol and diesel to cushion consumers from spiralling prices, a top official said.

The two fuels touched fresh highs today as the rupee dipped to a record low of 71.54 against the U.S. dollar, making imports costlier.

With imports becoming costlier because of a weaker rupee, the government believes the current account deficit will overshoot the target and it cannot “disturb fiscal maths by cutting excise duty on petrol and diesel”, the official, who wished not to be identified, said.

Petrol price in Delhi rose to a record Rs 79.31 a litre, and diesel climbed to an all-time high of Rs 71.34, renewing calls for a cut in excise duty to cushion the spike. Almost half of the retail selling price of the two fuels is made up of central and state taxes.

According to a price notification of state-owned fuel retailers, petrol price today was hiked by 16 paise per litre, and diesel became costlier by 19 paise per litre. Fuel rates have been on fire since mid-August, rising almost every day due to a combination of a drop in rupee and a rise in crude oil.

Petrol price has risen by Rs 2.17 per litre since August 16 while diesel rates have climbed by Rs 2.62—the biggest increase in any fortnight since the launch of daily price revision in mid-June last year.

“Relentless rise in prices of petrol and diesel is not inevitable,” former Finance Minister and Congress leader P Chidambaram said. “Because the price is built up by excessive taxes on petrol and diesel. If taxes are cut, prices will decline significantly.”

The official in the Finance Ministry, however, said, “We already know that there will be a hit on current account. Knowing that we can't disturb the fiscal deficit, we should rather be fiscally prudent.”

While fiscal deficit means expenditure higher than income, current account deficit is the difference between inflow and outflow of foreign currency.

In an election year, the spending cut is not an option, the official said reasoning that it would hamper government's spending on development schemes. “The government cannot disturb fiscal maths by cutting excise duty,” he said.

Last week, credit rating agency Moody's Investors Service said there are risks of India breaching the 3.3 percent fiscal deficit target for the current financial year ending March 31, 2019, as higher oil prices will add to short-term fiscal pressures.

CAD will widen but will not jeopardise India’s external position, and the gap will remain significantly narrower than five years ago, it had said. The government has budgeted fiscal deficit to be at 3.3 percent of the gross domestic product in the current fiscal year 2018-19.

Also driven by higher oil prices and robust non-oil import demand, Moody's expects the current account deficit to widen to 2.5 percent of GDP in the fiscal year ending March 2019, from 1.5 percent in fiscal 2018.

Tax Contribution To Fuel Price

Almost half of the fuel price is made up of taxes. The centre currently levies a total of Rs 19.48 per litre of excise duty on petrol and Rs 15.33 per litre on diesel. To top it off, states levy value-added tax, the lowest being in Andaman and Nicobar Islands at 6 percent.

Mumbai has the highest VAT of 39.12 percent on petrol, while Telangana levies the highest VAT of 26 percent on diesel. Delhi charges a VAT of 27 percent on petrol and 17.24 percent on diesel.

The central government raised excise duty on petrol by Rs 11.77 a litre and that on diesel by Rs 13.47 a litre in nine instalments between November 2014 and January 2016 to shore up finances as global oil prices fell, but then cut the tax just once in October last year by Rs 2 per litre.

This led to its excise collections from petro-goods more than doubling in last four years—from Rs 99,184 crore in 2014-15 to Rs 2.29 lakh crore in 2017-18. States saw their VAT revenue from petro-goods rise from Rs 1.3 lakh crore in 2014-15 to Rs 1.84 lakh crore in 2017-18.

A litre of petrol in Mumbai costs Rs 86.72 while diesel is priced at Rs 75.74 per litre. Prices in Delhi are the cheapest in all metros and most state capitals due to lower sales tax or VAT.

Officials said the spike in rates is on account of exchange rate falling to a record Rs 71 to a dollar, depreciating by Rs 2.5 in a month. Also, crude oil has gained $7 a barrel in a fortnight, driven by fears that the U.S. sanctions on Iran will likely contract supplies.